Self-employed individuals have more options when funding their retirement. Regular IRAs and Roth IRAs are available - so, for smaller amounts, see the blog below on that topic. 4 options for larger amounts of contributions include SIMPLE IRAs, SEP IRAs, Solo-401ks, and Defined Benefit plans.Target group for each type of plan

Simple IRA - employers looking to defer up to 12,500 per employee. Employers must match or contribute.

SEP IRA - Employer looking for flexibility on which employees they are funding, or self employed individual making more than $250,000 per year. Contributions limited to $53,000

Solo-401k - Self employed individual making less than $250,000 per year. Contributions limited to $53,000

Defined Benefit - Employer or self-employed individual looking to contribute more than $53,000 toward retirement in a year - up to $210,000 in 2015.

Fidelity has a chart with more details on each"https://www.fidelity.com/retirement-ira/small-business/compare-plans

SEP vs. Solo 401kFor most of my self-employed clients, the question is usually around SEP or Solo-401k plans. Why is one better than the other if they have the same limits? You can hit the limits MUCH faster with a solo-401k. With both plans, you are permitted an 'employer' contribution of about 20% of your net business income. I say about, because the calculation is a bit more complex. but with a solo-401k, you can also contribute the employee portion of up to $18,000 or $24,000 depending on whether or not you have reach 50 years of age. For example, if your schedule C income was $100,000 this year, you could contribute about 20,000 to your account with a SEP, or (20,000 + 18,0000) to your account with a solo-401k.

Why would anyone choose a SEP? I see three reasons:

​If you have full-time employees you will not be eligible for a solo-401k - you will have to provide the 401k to your employees. Note: plans vary regarding part-time employees.

If you want to set up a plan AFTER the year is over, you can only do that with a SEP. Note: if your 401k is set up before year end, you can contribute before you file.

Some clients had SEP IRAs before Solo-401ks became inexpensive and practical, and don't have high funding requirements. These clients often don't bother switching.

That's in for now - stay tuned next time for retirement distributions!

Author

I spent 13 years in big-4 accounting firms before leaving to start his own small firm in San Mateo. You can find more about me in the "our firm" tab. I plan to use this space to highlight tax concepts and tax law changes in easy to understand language. Each post will have examples on how typical taxpayers are affected by life events or the ever-changing US tax landscape. Nothing in here is canned - its all written by me.